Budget Management Archives : Planergy Software

Written by Keith Murphy
19 min read

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Last edited

December 15, 2023

KEY TAKEAWAYS

School finance is complex, and budget monitoring is important to prevent overspending.
Even using last year’s data to support the current year for your current budget may lead you astray without close monitoring, as factors change over time.
Following best practices and facing challenges head-on can help.

Understanding School Budgets

A school budget is more than just a financial document. It’s a strategic tool that maps out the allocation of resources over a specified period, typically a school year.

With a well-planned budget, schools can anticipate revenues, plan for expenditures, and analyze whether there are enough funds to cover operational needs and educational programs for the upcoming financial year.

For instance, a school may allocate part of its budget to improve its science labs to enhance students’ learning experiences.

This decision would be reflected in the budget, showing how much funding will be directed towards this project.

The Significance of Budget Management in Schools

Budget management is the beating heart of every school administration. It ensures transparency, aids decision-making, and enables schools to allocate resources where needed.

Effective budget planning and management prepares schools for financial uncertainties and helps manage risks.

For example, if a school has a robust financial management system in place, it can better handle unexpected situations by budgeting for these variable expenses.

Sudden maintenance or repair work or the need for additional staffing costs due to long term sick leave are likely realities for schools that need to be factored into the budget.

The School Budgeting Process

The budgeting process in schools works similarly to any business budget. Creating a school budget is a meticulous process that involves several steps:

Setting Objectives
This foundational stage involves identifying what the school aims to achieve, from enhancing student services to upgrading facilities or investing in professional development for staff.
These objectives should align with the school’s mission and long-term strategic plan.
For instance, if a school’s mission is to provide a holistic education, an objective could be to allocate funds toward expanding arts programs or sports facilities.
Estimating Income and Expenditure
On the income side, this includes predicting revenues from various sources such as government funding (dedicated schools grants, for instance), donations, and fundraising activities.
On the expenditure side, schools must forecast their expenses, including salaries, maintenance costs, supplies, and capital expenditures.
This step requires careful consideration of past spending patterns, future projections, and current economic conditions.
A school might, for example, anticipate an increase in energy costs due to rising prices and factor this into its expenditure forecast.
If you’re unsure where to start, use the previous year as a benchmark. If this is your first year, look at similar schools in the area as a starting ground.
Creating the Budget
This document serves as a financial roadmap for the school year ahead, outlining how much will be spent in each category and where the funds will come from.
This step requires collaboration and consensus-building among stakeholders, including school administrators, headteachers, and the local authority. It may also involve difficult decisions about where to allocate resources and what priorities to focus on.
Implementing and Monitoring the Budget
This involves distributing funds as outlined in the budget and regularly monitoring expenditures to ensure they align with the budget.
For example, if a school has allocated a certain amount for classroom supplies, the purchasing department must ensure they stay within this limit when ordering supplies to prevent overspending.
Review and Adjust
At the end of the budget period, it’s time to review it and make adjustments for the next year. Carry out budget analysis reporting, investigate budget variances, and learn lessons to improve budget reporting and forecasting going forward.
This review process involves comparing actual income and expenditures with the estimates and analyzing discrepancies.
For example, if a school underestimated its maintenance costs, it would need to adjust these figures in the next budget.
This continuous cycle of review and adjustment allows schools to improve their budgeting processes over time based on real-world experience and evolving needs.

How School Budgets are Divided

Schools typically divide their budgets into different categories.

Instructional Costs: Investing in Learning
Instructional costs form the backbone of any school budget. These costs directly impact the quality of education provided to students. They include teacher salaries, textbooks, classroom supplies, and other learning materials.
For instance, a school focusing on improving academic performance might allocate a significant portion of its budget toward instructional costs.
This can involve investing in high-quality textbooks, hiring experienced teachers, or introducing new learning tools and technologies to enhance student engagement and learning outcomes.
Non-Instructional Costs: Supporting the School Ecosystem
Non-instructional costs are equally vital for the smooth operation of a school.
These day-to-day costs cover administrative expenses, maintenance of school buildings and grounds, and support providers like school nurses or counselors.
Schools need to allocate sufficient funds to these areas to ensure a safe, clean, and supportive environment for students.
For example, regular maintenance can prevent larger repair costs down the line. At the same time, investment in support services can help address student well-being and mental health, contributing to better academic outcomes.
Capital Expenditures: Building for the Future
Capital expenditures refer to major costs related to infrastructure improvements or technology upgrades. These are often large, one-off expenses that require careful planning and budgeting.
For example, a school might decide to refurbish its library or invest in a new IT system.
While these costs can be substantial, they are critical investments in the school’s future, enhancing the learning environment and equipping students with modern, up-to-date facilities and resources.

A school might allocate 60% of its budget to instructional costs, 30% to non-instructional costs, and the remaining 10% to capital expenditures.

Multi-Academy Trusts (MATs) and Their Unique Budgeting Approach

Multi-Academy Trusts (MATs) manage their budgeting differently. They receive their school funding from the Department for Education (DfE), which might be fully or partially centralised.

These academies are often comprised of both primary schools and secondary schools, and are inspected by Ofsted, just like maintained schools.

Two key concepts in MAT budgeting are GAG pooling and top-slice budget allocation.

GAG Pooling: A Strategy for Equity
GAG pooling stands for General Annual Grant pooling. This is a strategic financial approach adopted by MATs in the UK to ensure a more equitable distribution of resources among their academies.
Under this system, MATs pool their government-allocated funding into one central fund instead of directly distributing it to individual academies.
This pooled fund is then redistributed based on each academy’s specific needs and circumstances within the trust.
For example, an academy with more students with special educational needs might require additional resources to provide tailored support and services.
Through GAG pooling, the MAT can allocate more funds to this academy, ensuring all students across the trust have access to the necessary resources.
This approach moves away from a ‘my school’ mindset to an ‘all children in the MAT’ perspective.
It allows resources to be directed to areas where they are most needed, promoting equity and ensuring that every student, regardless of which academy they attend, has the opportunity to succeed.
However, it’s critical for MATs to manage this process transparently and consult with all stakeholders to ensure that the funds are being allocated fairly and effectively.
Regular reviews and adjustments may also be necessary to respond to changing needs and circumstances within the trust.
In essence, GAG pooling is about putting the collective needs of students first and using resources strategically to achieve the best possible outcomes for all.
GAG pooling is becoming the most popular approach for trusts.
Top-Slice Budget Allocation: Covering Central Services
Top-slice budget allocation is a common practice in MATs that ensures the provision of essential central services.
The term ‘top slice’ refers to a percentage of the total funding that is taken off the top – or deducted first – before the remaining funds are distributed among the academies within the trust.
These top-sliced funds are used to cover the costs of central services provided by the MAT.
These services can vary between trusts but often include areas such as human resources, legal support, financial management, strategic planning, and other overhead costs associated with running the trust.
For example, if a MAT receives a total grant of £1 million and decides on a 5% top slice, £50,000 would be allocated to cover central services.
The remaining £950,000 would then be distributed among the academies in the trust, either evenly or based on individual needs.
This approach ensures that all academies within the trust have access to essential services and expertise, which can lead to cost savings and efficiencies.
Instead of each academy having to fund these services independently, they can share the costs, allowing more funds to be directed toward teaching and learning.

Though not for profit, school’s must be managed as businesses to ensure continuous smooth operation for students and staff.

Best Practices for Building a MAT School Budget

Know Your Schools Needs
Understanding each academy’s unique needs, challenges, and opportunities within the trust is crucial.
This includes knowing the demographics of students, specific requirements, and performance metrics. This in-depth knowledge allows for a more tailored and effective budgeting process.
Centralise Control of ‘Big-Ticket’ Items
Large expenses that affect multiple academies within the trust should be managed centrally. This can lead to cost savings through economies of scale and ensure consistency across the trust.
Examples of big-ticket items might include IT/ICT infrastructure or learning management systems.
Putting this with your MATs governing body can get you better deals and helps avoid some of the common problems with education procurement, since you’re purchasing with a higher volume.
Have a Long-Term Plan
While annual budgets are important, having a long-term financial plan is crucial.
This rolling plan should look ahead at least three to five years, allowing the trust to plan for future investments, anticipate changes, and ensure financial sustainability.
Implement Robust Financial Monitoring
Regular monitoring of actual income and expenditure against budget projections is essential.
This allows for early identification of any issues or discrepancies and enables timely adjustments to be made. Financial reports should be clear, concise, and provided to all relevant stakeholders.
Use GAG Pooling and Top Slicing Strategically
GAG pooling and top slicing are powerful tools for MATs.
However, they need to be used strategically and transparently. Regular reviews and adjustments may be necessary to ensure funds are being allocated most effectively and fairly.
Engage Stakeholders
Effective budgeting isn’t a solo activity. It requires input from various stakeholders, including the local authority, school leaders, headteachers, and governors.
Regular communication and consultation can lead to a more informed and accepted budget.
Invest in Professional Development
Investing in the financial skills and knowledge of those involved in budgeting can pay dividends.
This can help ensure that budgets are realistic, strategic, and aligned with the trust’s educational objectives.
Stay Informed of Policy Changes
Government policies and funding arrangements can have significant implications for school budgets. Staying informed of any changes and understanding their impact is crucial.

Navigating Challenges in School Budgeting

Budgeting in education comes with a unique set of challenges. These obstacles can be significant but can be navigated successfully with strategic planning and effective management.

Balancing Staffing Costs
The largest expenditure for any school is staffing costs. Schools must ensure they have enough teachers to maintain a reasonable student-teacher ratio and provide quality education.
However, budget constraints can make paying more staff salaries difficult. Increases in staffing costs that are not matched in funding means school budgets are increasingly stretched.
Schools must balance hiring enough staff and staying within their budget.
For instance, a school might decide to invest in professional development for existing staff to increase their teaching capacity instead of hiring additional staff.
Another strategy could be employing part-time or substitute teachers to manage peak times.
Dealing with Funding Shortages
Another major challenge is dealing with funding shortages. Many schools rely heavily on government funding, which may not always be sufficient or reliable.
Schools need to have strategies in place to handle these situations.
This can include seeking additional funding sources such as grants, donations, or fundraising activities.
Schools may also consider cost-saving measures, like energy-efficient upgrades, to reduce utility costs.
Handling Unexpected Expenses
Unexpected expenses are another hurdle in school budgeting. These can range from sudden repair work to unforeseen events like natural disasters or public health emergencies.
Schools should aim to build a contingency fund into their budget to handle these situations.
This provides a financial cushion that can help cover unexpected costs without disrupting the school’s operations or dipping into funds allocated for other areas.

The Bottom Line

Effective budget management is key to the successful operation of schools and academies.

By understanding key budgeting concepts and practices, schools can use their resources most efficiently and effectively as possible to support their educational goals.

From setting clear financial objectives to navigating challenges with resilience, school budgeting is a dynamic process that requires continuous learning and adaptation.

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Multi-Academy Trust (MAT): What Is It and How Can Schools Benefit?

Rob Biedron — Mon, 11 Dec 2023 14:21:32 +0000

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Multi-Academy Trust (MAT): What Is It and How Can Schools Benefit?

Category

Budget Management Education Financial Planning & Analysis (FP&A)

Written by Rob Biedron
21 min read

Tags

Last edited

July 2, 2024

KEY TAKEAWAYS

Multi-Academy Trusts (MATs) are a group of state-funded schools that work together under one central board of directors.
MATs aim to band multiple schools together to strengthen all of them.
Joining a MAT is a complex process that can go wrong if not well planned and managed.

What is a Multi-Academy Trust (MAT)?

A MAT is an academy trust that operates more than one state-funded school with direct funding from the Department for Education (DfE).

The group of academy schools operates under a single governing body or central board of directors.

This model is primarily used in the United Kingdom, where state-funded schools can become academies, giving them more autonomy over their operations than traditionally maintained schools.

History of MATs

According to the House of Lords Library, the 1997-2010 Labour Government first introduced the concept of academies.

Initially dubbed ‘city academies’ under the Learning and Skills Act 2000, they were officially renamed academies under the Education Act 2002, drawing inspiration from the city technical colleges initiated by the Conservative Government in the 1980s.

The academy policy was significantly expanded under the 2010-2015 Conservative-Liberal Democrat coalition Government, which passed legislation allowing all types of schools to become academies.

This included primary, special schools, and pupil referral units that previously needed eligibility.

The number of academies surged from 202 in 2010 to 4,722 in 2015, with student enrolment increasing from 192,640 to 2,742,394.

Since 2015, the Conservative Government has continued to promote academies.

Their March 2016 budget announced plans to convert all state-funded schools in England into academies by 2020.

They aimed for every primary and secondary school to either be an academy or be in the process of becoming one.

This policy encouraged top-performing schools to form and manage MATs to share their success with other schools.

The 2017 and 2019 Conservative Party manifestos reiterated their commitment to academies, pledging to encourage more organizations to sponsor academies or establish new free schools, a type of academy.

They also vowed to intervene in schools with persistent underperformance.

By the 2020/21 academic year, the number of academies had risen to 9,444, with 4,591,865 pupils attending these academies.

The Parliament published a 2022 whitepaper outlining the plan for all schools to be part of a MAT by 2030.

According to The Guardian reports, the last time this was tried in 2016, ministers were forced to reverse course partly due to pushback from Conservative councils.

The Role of Academy Schools

Academy schools are state-funded but independently run, meaning they have greater freedom over their curriculum, school budgeting, and staffing than regular state schools.

They are also free for pupils to attend.

They are inspected by Ofsted, like state schools. Pupils attending academy schools take the same assessments and aim for school improvement across the board.

Structure of a Multi-Academy Trust

In a Multi-Academy Trust, several of these academy schools join together under the leadership of a single governing body.

This central governing body has responsibility for strategic decisions across all the schools in the trust, including financial management, staffing, and educational performance.

Purpose of a Multi-Academy Trust

The aim of a MAT is to improve and maintain high educational standards across several schools through shared resources, best practices, and expertise.

The schools within a MAT often share common values and ethos, fostering a collaborative environment to improve educational outcomes for all students within the trust.

Overall, the main objective of a MAT is to provide a structure that allows for collaboration, resource sharing, and mutual support among a group of academies, with the ultimate goal of enhancing educational provision and outcomes for students.

Financial Aspects of a MAT

MATs are not-for-profit organizations, meaning any surplus funds must be reinvested into the trust’s schools.

They also have charitable status, which provides certain financial benefits such as exemptions from some forms of tax.

Rather than being controlled by the local authority, they receive funding from the government, in the form of a General Annual Grant (GAG).

Each unit within the family of schools can pool all or part of their GAG together to benefit all the individual schools in the entire trust.

They can also pool skills and knowledge to better benefit the entire trust. A good example of this is when it comes to addressing common problems in education procurement and sharing resources.

MATs will usually centralize specific business functions, like finance, to improve efficiency and reduce costs across the group of schools.

Single Academy Trust vs. Multi-Academy Trust

It’s important to note that while all academies are part of an academy trust, not all academies are part of a multi-academy trust. Some operate as a standalone academy under a single academy trust.

A Single Academy Trust operates only one school, giving it autonomy over its operations, including curriculum, budgeting, and staffing.

On the other hand, a Multi-Academy Trust involves several academy schools operating under a single governing body.

This structure allows for collaboration, resource sharing, and mutual support among the schools in the trust to improve educational outcomes for all students.

Whether a single or multi-academy MAT, proper allocation of resources is key to success.

Top 6 Performing Large Multi-Academy Trusts in the UK

The UK is home to numerous high-performing MATs, each with unique strengths.

These trusts stand out due to their consistently high performance, innovative teaching methods, robust governance, and commitment to continuous improvement and digital transformation.

The Progress 8 score is a key performance metric in the UK education system. It measures students’ progress from the end of primary school to the end of secondary school, compared to other students nationally with similar prior academic achievement.

According to recent data from Schools Week based on performance data reported by the government, these are the top MATs in the UK that have 10 schools or more. They all surpass the national average for Progress 8 performance of -0.03.

This achievement is all the more notable because most larger MATs include sponsored academies. These academies would have had ‘inadequate’ performance before joining the MAT.

Harris Federation

Established in 1990, the Harris Federation is one of the most successful MATs in the UK.

It manages a network of academies in and around London, with a strong record of transforming underperforming schools.

The trust has a reputation for high academic standards, strong discipline, and an emphasis on student character development.

Harris Federation had the highest progress 8 results among larger MATs with 0.39.
United Learning Trust

United Learning Trust operates a mix of state and independent schools across England. Known for its “Best in Everyone” ethos, United Learning Trust focuses on providing a well-rounded education that helps every student reach their full potential.

They emphasize character education, enriching learning opportunities, and strong partnerships between schools within the trust.

United Learning Trust had the second highest progress 8 results among larger MATs with 0.35.

This is all the more impressive as the trust includes 42 academies included in the evaluation.
Star Academies

Star Academies is a renowned multi-academy trust known for its commitment to educational excellence in the UK.

This commitment is demonstrated by the impressive scores achieved on the Progress 8 measure by schools within the trust.

Star Academies had the third highest progress 8 results among larger MATs with 0.33.
Delta Academies Trust

The Delta Academies Trust is a multi-academy trust that operates a network of schools to improve educational outcomes and change lives for children.

The trust’s residential center, Dallowgill, provides an environment for students to thrive as individuals.

Established as an exempt charity, its values are drawn from the public sector, and its directors are appointed voluntarily.

The Department for Education regulates the trust and operates 46 schools, making it a significant educational provider in North England.

Delta Academies Trust had the fourth highest progress 8 results among larger MATs with 0.30.
Ark Schools

Ark Schools is an international charity that runs a network of academies in the UK. The trust is recognized for its commitment to providing high-quality education in disadvantaged communities.

Ark Schools follows a knowledge-rich curriculum and provides robust training and development opportunities for staff.

Ark Schools had the fifth highest progress 8 results among larger MATs with 0.25.
Northern Education Trust

Northern Education Trust is a multi-academy trust in North England. It was established in 2012 and has grown to become one of the North’s largest MATs.

The trust operates 22 academies; 10 primary academies and 12 secondary.

Northern Education Trust had the fifth highest progress 8 results among larger MATs with 0.09.

Characteristics of an Excellent Multi-Academy Trust

An outstanding MAT typically features strong leadership, effective governance, and a dynamic curriculum.

The governance structure should be transparent and accountable, promoting the best interests of all schools within the trust.

Leadership is crucial in setting strategic direction, fostering a positive culture, and driving academic excellence.

Additionally, the curriculum should be broad, balanced, and flexible to cater to diverse learning needs.

Strong Leadership

Exceptional leadership is a cornerstone of any successful Multi-Academy Trust.

The leaders set the strategic direction for all schools within the trust and are responsible for fostering a positive culture that encourages collaboration, innovation, and continuous improvement.

They play a crucial role in driving academic excellence, ensuring that the trust’s vision and values are embedded in every aspect of the school’s operations.
Effective Governance

Effective governance is another key characteristic of an excellent MAT. The governance structure should be transparent, accountable, and focused on promoting the best interests of all schools within the trust.

The governing body should include individuals with diverse skills and experiences who can provide robust oversight, challenge the status quo when necessary, and make informed decisions that drive the trust’s strategic objectives.
Dynamic Curriculum

A dynamic and adaptable curriculum is essential in a top-tier MAT. The curriculum should be broad and balanced, offering a wide range of subjects and learning experiences to cater to students’ diverse learning needs and interests.

It should also be flexible enough to allow for local adaptations, ensuring that each school within the trust can tailor their curriculum to reflect its unique context and community.
Collaborative Culture

A collaborative culture is a defining feature of a high-performing MAT. This involves fostering a spirit of cooperation and mutual support among all schools within the trust.

Schools should be encouraged to share resources, expertise, and best practices, and work together to tackle common challenges and achieve shared goals. Cross-functional collaboration can benefit everyone.

This collaborative approach can improve educational outcomes, greater efficiency, and a stronger sense of community across the trust.
Commitment to Continuous Improvement

An excellent MAT is committed to continuous improvement. This involves regularly monitoring and evaluating the trust’s performance, seeking stakeholder feedback, and using this information to inform strategic planning and decision-making.

This may involve tracking and reviewing academic performance, mental health of staff and pupils, etc. This will ensure the best educational and well-being outcomes.

It will also likely include tracking common business KPIs like procurement KPIs and accounts payable KPIs. This will ensure the best business efficiency and value for money is realised by the trust.

A commitment to continuous improvement ensures that the trust always strives to enhance its educational provision and deliver the best possible outcomes for all students.

Potential Drawbacks of Multi-Academy Trusts

While MATs offer many benefits, they have potential drawbacks. These include the risk of losing individual school identity, potential inconsistencies in educational standards across the trust, and challenges in managing diverse school needs.

Effective leadership with a strong chief executive, clear communication, and regular monitoring can help mitigate these issues.

Loss of Individual School Identity

As schools join a MAT, they often adopt the trust’s common ethos and strategic direction.

While this can foster unity and collaboration, it may dilute each school’s unique culture and traditions.

This can concern parents, students, and staff who value their school’s existing identity.
Inconsistencies in Educational Standards

While one of the aims of MATs is to improve and maintain high educational standards across all schools, achieving this consistently can be challenging.

There might be variations in performance between different schools within the trust due to various factors, including leadership quality, resources, and community context.

This could lead to disparities in student outcomes and experiences across the trust.
Managing Diverse School Needs

Managing the diverse needs of multiple schools can be a complex task. Each school within a MAT has its unique challenges, opportunities, and community context.

Balancing these diverse needs while maintaining a unified strategic direction can be a delicate juggling act.
Centralization of Power

The power within a MAT is often centralized in the hands of a few key individuals or the central board of trustees.

This can lead to decisions being made that are distant from the unique contexts of individual schools. If not managed carefully, this can result in decisions that do not fully consider the specific needs of each school.
Financial Risks

While pooling resources can lead to efficiencies, it also presents financial risks. If one school in the trust faces financial difficulties, it could impact the entire trust.

Additionally, as MATs grow in size, they may face increased scrutiny and regulatory requirements, adding to their operational complexity and cost.

Many headteachers have raised issues with joining a MAT, according to The Guardian.

Alex Smythe is headteacher of Newcroft primary school in Leicestershire who says, “We were already supporting another school quite significantly and, to an extent, we were forced to form a multi-academy trust (MAT) because that school was close to being closed or taken over by others.” She likened it to doing a favor for the DfE.

Rob Campbell, principal of Impington Village College, said, “Moving into a MAT is even more complex; are you the lead school? How are you working together? What’s your scheme of delegation?”

Rob continues, “Becoming part of an MAT is like marriage without the possibility of divorce – and let’s face it, most of us would think very carefully if there was no divorce. Talk to as many people who have gone through it as you can. You really need to know and understand the process, and if you don’t yet, find a way to make damn well sure that you do.”

That’s why due diligence is so important.

Is the Multi-Academy Trust Model the Future of UK Education?

The MAT model has become increasingly prevalent in the UK education sector in recent years.

Its emphasis on collaborative working, resource sharing, and mutual support aligns well with the evolving needs of today’s learners.

However, like any educational model, its success largely depends on effective implementation and continuous improvement.

Examples of successful MATs show that with robust governance, strong leadership, and a student-centred approach, the MAT model can contribute significantly to UK education’s future.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

Read our case studies, client success stories, and testimonials.
Visit our “Solutions” page to see the areas of your business we can help improve to see if we’re a good fit for each other.
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2. Download our “Indirect Spend Guide”

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

The post Multi-Academy Trust (MAT): What Is It and How Can Schools Benefit? appeared first on Planergy Software.

GAG Pooling: What Is It, Challenges, and Benefits

Rob Biedron — Fri, 13 Oct 2023 11:12:47 +0000

Download a free copy of "Indirect Spend Guide", to learn:

Where the best opportunities for savings are in indirect spend.
How to gain visibility and control of your indirect spend.
How to report and analyze indirect spend to identify savings opportunities.
How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

Download Free Copy

GAG Pooling: What Is It, Challenges, and Benefits

Category

Budget Management Education Financial Planning & Analysis (FP&A)

Written by Rob Biedron
18 min read

Tags

Last edited

December 15, 2023

KEY TAKEAWAYS

GAG pooling allows multiple schools within a multi-academy trust to group the GAG funding from each school into one central budget.
While it offers numerous benefits, there are several challenges to consider.
Policies and agreements are necessary to ensure all school budgets are adequate and supported.

GAG pooling, short for General Annual Grant pooling, is a principle in UK education funding where the funds allocated to each school within a Multi-Academy Trust (MAT) are combined.

Rather than each school managing its budget independently, all the funds are pooled and then distributed based on strategic decisions made by the MAT.

The GAG is a block grant from the Education and Skills Funding Agency (ESFA), calculated based on student numbers and needs. The grant covers running costs like salaries, utilities, and learning resources. As such, it’s a crucial lifeline that enables schools to operate effectively and provide quality education.

Not all Trusts limit themselves to pooling only the GAG income. Some also pool other ESFA or Local Authority income streams and self-generated, non-government income.

While the ESFA encourages GAG pooling, they have not provided detailed practical management guidance. There are no strict rules regarding which income streams should or shouldn’t be pooled.

As stated in the Academies Trust Handbook by the ESFA, the only exception is Private Finance Initiative (PFI) funding. According to the academy’s funding agreement, PFI funding should not be pooled.

What is GAG pooling?

GAG pooling is a strategic approach in financial management where the GAG funding of all schools within a MAT is combined into a single, central fund.

It deviates from the traditional model where each school manages its budget independently.

Instead, the MAT leadership redistributes the pooled funds across schools based on strategic priorities and individual school needs. This approach fosters collective responsibility, financial stability, and strategic resource allocation.

Why Use GAG Pooling?

The primary purpose of GAG pooling is to enable more strategic and flexible use of resources across a MAT.

It can enhance purchasing power as larger orders or contracts may attract discounts, allow for flexibility in budget allocation based on specific needs, and even help struggling schools through financial difficulties.

However, implementing GAG pooling comes with its challenges.

Individual schools may resist due to fear of losing control over their budgets.
New governance structures must be established to oversee and manage pooled resources, potentially adding complexity to the existing system.
Managing a larger budget can also be difficult, requiring financial expertise and robust management systems.

Top Slice GAG

Top slicing is a practice where the Trust Central Management retains a portion of each school’s GAG funding for central services.

These services can include HR, IT support, and other shared services that benefit all schools within the trust.

Top slicing aims to reduce operational costs at individual schools by leveraging economies of scale. However, unlike GAG pooling, top slicing doesn’t involve the complete consolidation of budgets.

Top Slice vs. GAG Pooling

While both GAG pooling and top slicing are financial strategies employed by MATs, they differ significantly in how they handle funds.

In top slicing, only a portion of the GAG funding is taken by the Trust, leaving the rest for individual schools to manage. This model allows for some centralisation of resources but maintains a degree of financial autonomy at the school level.

On the other hand, GAG pooling involves fully consolidating all GAG funding into a single pool managed by the MAT. The MAT then allocates funds strategically across schools based on needs and strategic priorities.

This model promotes greater financial flexibility and strategic resource allocation but requires robust governance structures and clear communication to ensure fair and effective distribution of funds.

It’s up to school leaders in the MAT to build and develop the trust board, agreements, policies, etc. in a way that will benefit all members.

Benefits of Gag Pooling

Enhanced Purchasing Power
One of the primary benefits of GAG pooling is increased purchasing power, for better and faster procurement.
By consolidating funds they can also consolidate and centralize purchasing in certain areas of spend, MATs can negotiate better deals with suppliers and service providers, thus saving costs and maximizing resources.
For example, a MAT might negotiate a bulk purchase of IT equipment or learning resources across its schools, securing a significant discount that wouldn’t be accessible to individual schools.
Flexibility in Budget Allocation
GAG pooling allows for greater flexibility in budget allocation. Funds can be directed towards schools or projects that need them the most, ensuring resources are used strategically and effectively.
This flexibility can be particularly beneficial during times of unexpected financial strain, such as the need for sudden infrastructure repairs or investment in new teaching resources.
When exceptional costs arise during the year individual schools will no longer need to make very difficult decisions to find the needed funds, this can be absorbed by central funding.
Supporting Struggling Schools
GAG pooling provides a safety net for weaker schools facing financial difficulties. Instead of struggling schools trying to navigate financial challenges alone, resources can be allocated from the pooled funds to support them.
This collective responsibility fosters a supportive environment and ensures all constituent academies within the MAT can thrive.

Challenges of GAG Pooling

Economic Challenges
One of the primary economic challenges is the fear of losing financial autonomy. Schools may resist GAG pooling as they worry about losing control over their budgets. Losing autonomy is a key cultural challenge for any school joining a MAT.
This resistance can be particularly strong in financially healthy schools that might perceive GAG pooling as a risk to their stability.
Another economic challenge is the potential for financial mismanagement. Handling a large, consolidated budget requires powerful financial systems and expertise.
Without these, there’s a risk of misallocating funds, which could lead to financial instability within the MAT.
Cultural Challenges
Culturally, GAG pooling represents a significant shift from ‘my school’ to ‘our schools.’ It requires a collective mentality and trust among all stakeholders, which can be challenging to cultivate.
Individual schools may fear that their unique needs will be overlooked in favor of a one-size-fits-all approach. Headteachers may feel their autonomy being eroded.
Systemic Challenges
Systemically, implementing GAG pooling requires changes to governance structures. New decision-making processes must be established to manage the pooled resources, adding another layer of complexity to the existing system.
There may also be legal hurdles to overcome, as the current policies may not fully support the concept of GAG pooling.

Steps for Effectively Pooling GAG

Draft a Pooling Policy or Agreement
The first step is to draft a formal GAG pooling agreement or policy. This document should clearly outline how the pooled funds will be managed and allocated.
It should cover everything from the decision-making process to the procedures for handling any disputes. The agreement should be transparent, fair, and agreed upon by all schools within the MAT.
Maintain GAG Receipts
Keeping accurate records of GAG receipts is crucial for transparency and accountability.
Detailed records of the GAG funding received per school should be maintained, this is usually the responsibility of the Trust. These records can then be audited to ensure all funds are correctly pooled and distributed.
Operate with Budget Centralisation
Centralising the budget is a key aspect of GAG pooling. This involves consolidating all budgets within the MAT and having a central body – usually the MAT leadership or a designated committee – manage them.
The central body is responsible for allocating funds strategically across schools, ensuring resources are used effectively and efficiently.
Individual schools are not required to operate at cost neutral or surplus avoiding the need for budget deficits to be explained to the ESFA at school level as the Trust as a whole is not in deficit.
Monitor Schools
Regularly monitoring schools within the MAT is necessary to determine their financial needs and ensure funds are being used appropriately. It is also mandatory as part of the governance guidance for MATs.
This could involve regular financial audits, reviews of spending, and assessments of financial performance. Monitoring helps identify any issues early and allows for timely interventions if needed.
Maintain Centralised Spend
Maintaining a centralised spend involves managing certain expenditures at the central level rather than at individual schools.
This could include shared services like IT support or HR, or bulk purchases of resources. Centralising these expenses can lead to cost savings through economies of scale.
Decide How to Treat Brought Forward Reserves
Each school within a MAT may have its reserves brought forward from previous years. Deciding how to treat these reserves under GAG pooling is an important step.
Some MATs may pool these reserves, while others may allow schools to keep them. The decision should be clearly stated in the GAG pooling agreement.
Appraisal Process
Finally, implementing an appraisal process is crucial for evaluating the effectiveness of GAG pooling. This could involve regular reviews of financial performance, school feedback, and assessments of whether the GAG pooling meets its objectives.
The appraisal process helps identify areas for improvement and ensures the GAG pooling strategy remains effective and beneficial for all schools within the MAT.

Tips for Successfully Implementing GAG Pooling

To help address the challenges in the organisational process, there are several things you can do to mitigate everything.

Communicate Clearly
A key element of any successful change management plan is communication.
Clear and transparent communication is key to overcoming resistance towards GAG pooling.
Stakeholders, including headteachers and staff at all levels, should be informed about the process, its benefits, how funds will be allocated, and how it may affect them.
Regular updates and an open-door policy for questions can help build trust, alleviate fears about the loss of autonomy, and avoid employee pushback during the process of change.
It’s also important to communicate success stories and demonstrate the positive impact of GAG pooling on schools within the MAT.
Invest in Robust Financial Management Systems
GAG pooling requires robust financial management systems and expertise. MATs must invest in developing or upgrading their financial systems to handle the complexities of managing a large, consolidated budget.
This could involve hiring additional finance staff, training an existing finance team, or investing in financial management software.
With a strong system in place, MATs can ensure effective management of pooled resources, reducing the risk of misallocation and promoting financial stability.
Cultivate a Collective Mentality
Cultivating a collective mentality among the schools within a MAT is crucial for successfully implementing GAG pooling.
This involves fostering a sense of collective responsibility and unity. Workshops, team-building activities, and regular inter-school meetings can help achieve this.
The goal is to shift the mindset from ‘my school’ to ‘our schools,’ emphasizing that GAG pooling benefits the MAT as a whole.
Effective Governance Structures
Developing clear and effective governance structures is another critical step.
This involves setting up a decision-making process that is fair, transparent, and considers the unique needs of each school, as well as an appeals process to address any issues that may arise.
When everyone understands the appeals mechanism, individual academies can speak up about appealing decisions they don’t agree with.
A representative committee could be formed to oversee the management of pooled resources, with members from each school within the MAT.
This central team would make strategic decisions about fund allocation, ensuring all member schools have a voice.
Advocate for Policy Change
Advocacy for policy changes that support GAG pooling can help overcome legal and systemic hurdles. Lobbying relevant local authorities or working with education policy specialists can play a crucial role.
By advocating for supportive policies, MAT leadership teams can ensure a more conducive environment for GAG pooling, helping to streamline its implementation and maximize its benefits.

Is GAG Pooling the Way to Go?

GAG pooling requires careful financial planning, robust systems, and ongoing monitoring.

By following these steps, MATs can ensure effective and efficient GAG pooling, leading to strategic resource allocation and improved financial stability for every school within the organization.

A centralized spend management software, like Planergy, can help MATs in many ways.

Giving better visibility of spend across schools, accurate real-time spend versus budget reports, report on expenditure by fund, enforce internal controls for purchasing, automate accounts payable processing, and much more.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

Read our case studies, client success stories, and testimonials.
Visit our Spend Analysis Software page to see how Planergy can empower you to get more value from your spend.
Learn about us, and our long history of helping companies just like yours.

2. Download our “Indirect Spend Guide”

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

The post GAG Pooling: What Is It, Challenges, and Benefits appeared first on Planergy Software.

Strategic Budgeting: What Is It, Process, and Best Practices

Lyle Del Vecchio — Wed, 06 Sep 2023 11:53:31 +0000

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Strategic Budgeting: What Is It, Process, and Best Practices

Category

Best Practices & Tips Budget Management Process & Procedures

Written by Lyle Del Vecchio
17 min read

Tags

Last edited

December 15, 2023

KEY TAKEAWAYS

Strategic budgeting combines long-term budgeting with an organization’s strategic priorities.
For the greatest chance of success, senior leadership should be involved in setting goals and determining success metrics that are aligned to budgets.
Being agile enough to make adjustments as circumstances change is key.

Budgeting is a critical financial planning and management aspect for individuals, businesses, and organizations.

Among the various types of budgeting, strategic budgeting stands out as a powerful tool for achieving long-term financial goals.

This comprehensive guide will delve into strategic budgeting, its importance, the steps involved in creating a strategic budget, benefits, challenges, best practices, and help identify differences between forecasting and budgeting.

What is Strategic Budgeting?

Strategic budgeting is a process that combines budgeting with strategic planning, aligning an organization’s financial resources with its long-term objectives.

It focuses on allocating resources effectively, prioritizing investments, and ensuring financial stability while pursuing growth and innovation.

Different Types of Budgeting Methods

There are various different types of budgets and budgeting models in accounting.

Incremental Budgeting
Incremental budgeting is a traditional approach to budget planning that involves taking the previous year’s annual budget and adjusting it based on factors such as inflation, cash flow, or other changes in the organization’s financial landscape.
This method is simple to implement and maintain, relying on historical data and relatively minor adjustments.
However, incremental budgeting may not account for changing priorities, short-term expenditures, or new opportunities, limiting its effectiveness in some situations.
Zero-Based Budgeting
Zero-based budgeting is a more rigorous approach that requires every expense to be justified each budgeting period, starting from zero.
This method encourages efficiency and reduces unnecessary spending by forcing organizations to evaluate each expenditure and its contribution to its goals carefully.
While zero-based budgeting can lead to more effective resource allocation, it can be time-consuming and challenging to implement, as it requires a comprehensive review of all expenses during each budgeting cycle.
Activity-Based Budgeting
Activity-based budgeting focuses on the cost of activities and processes required to achieve specific objectives.
By examining the relationship between costs and outcomes, activity-based budgeting helps organizations identify inefficiencies, allocate resources more effectively, and improve overall financial performance.
This type of budgeting can be complex and require significant data analysis, making it more suitable for organizations with well-defined processes and the ability to gather detailed cost information.
Strategic Budgeting
Strategic budgeting, as previously mentioned, is a method that combines strategy and budget planning, emphasizing long-term objectives and resource allocation.
This approach ensures that an organization’s financial resources are aligned with its overarching goals, promoting growth, innovation, and financial stability.
By focusing on long-term priorities and investments, strategic budgeting helps organizations make informed decisions about resource allocation and adapt to changing market conditions.

Why are Budgeting Strategies Important?

Budgeting strategies like strategic budgeting help organizations make informed decisions about resource allocation, prioritize investments, and ensure financial stability.

They provide a roadmap for achieving long-term goals, promoting growth and innovation while managing risks and uncertainties.

The Strategic Budgeting Process

Creating a strategic budget involves the following steps:

Set Long-Term Goals and Objectives
Begin the strategic budgeting process by defining your organization’s long-term goals.
These goals can include market expansion, new product development, revenue growth, or other objectives that drive your organization’s success. Setting clear and measurable goals will provide the foundation for the rest of the budgeting process.
Identify Key Initiatives
With your long-term objectives, determine the strategic initiatives required to achieve these goals.
Such initiatives may include marketing campaigns, research and development projects, or hiring new talent. Identifying key initiatives helps ensure that your budget is focused on activities that contribute directly to your organization’s long-term success.
Develop Financial Projections
Next, develop financial projections for each identified initiative. Estimate the costs associated with each initiative and project revenues based on market trends, historical data, and growth expectations.
Accurate financial projections are essential for allocating resources effectively and setting realistic expectations for the outcome of each initiative.
Allocate Resources
With financial projections in hand, allocate financial resources to each initiative. Prioritize initiatives with the highest potential impact on your long-term objectives, ensuring that your budget is aligned with your organization’s goals.
Resource allocation is a critical step in the strategic budgeting process, as it determines where your organization will invest its time, effort, and money.
Monitor Progress
Finally, regularly review your strategic budget versus actual expenditure and monitor progress towards your long-term objectives. Compare actual results with your projections and adjust as needed to stay on track.
Monitoring progress is crucial for maintaining accountability, identifying areas for improvement, and ensuring that your strategic budget remains aligned with your organization’s goals. You can make data-driven decisions that drive your organization forward by consistently evaluating your budget’s performance.

Benefits of Strategic Budgeting

Aligning Resources with Long-Term Strategic Goals
Strategic budgeting allows organizations to focus on their most important initiatives, ensuring that resources are allocated effectively and efficiently.
By aligning financial resources with long-term goals, organizations can prioritize investments that contribute directly to their success, making the most of their available resources.
Encouraging Innovation and Growth
One of the key benefits of strategic budgeting is its ability to promote investment in new opportunities and support long-term growth.
Organizations can continually evolve, adapt, and stay competitive in their respective industries by identifying and prioritizing initiatives that drive innovation and expansion. An agile business can be ready to seize opportunities.
Improving Decision-Making
Strategic budgeting provides a clear roadmap for achieving an organization’s objectives, which helps improve decision-making at all levels.
With a well-defined budget, organizations can make informed decisions about investments and resource allocation, ensuring that every financial decision supports their long-term goals and overall strategic vision.
Enhancing Financial Stability
Strategic budgeting contributes to an organization’s financial health and stability by prioritizing investments and managing business risks.
Organizations can identify areas where resources may be better allocated, reduce unnecessary spending through strong budgetary control and spend control, and ensure they are prepared to weather any financial challenges that may arise.
This proactive approach to financial management helps organizations maintain a strong financial position and achieve their long-term objectives.

Challenges of Strategic Budgeting

Ensuring Accurate Projections
One of the main challenges of strategic budgeting is developing accurate financial projections, which can be difficult in uncertain or rapidly changing markets.
Organizations must carefully analyze historical data, market trends, and other relevant factors to create realistic budget forecasting projections that accurately reflect their long-term goals and objectives.
When planning your projections you should also ensure you are budgeting for variable expenses, if not planned for these can easily blow your budget.
Inaccurate projections can lead to poor decision-making and resource allocation, ultimately undermining the effectiveness of the strategic budget.
Fostering Collaboration
Creating a strategic budget requires input and cooperation from various organizational departments and stakeholders. This involves other departments collaborating effectively with finance.
This collaboration can be challenging, as different departments may have competing priorities, differing opinions on resource allocation, or varying levels of understanding about the organization’s overall strategy.
To overcome this challenge, organizations must foster a culture of open communication, shared goals, and commitment to the strategic budgeting process.
Maintaining Ongoing Monitoring
Effective strategic budgeting demands regular reviews and adjustments, which require time and effort from all involved parties.
Organizations must continually monitor their progress, compare actual results with projections, and make necessary adjustments to stay on track.
Having real-time spend visibility, carrying out budget variance analysis, reviewing spend analysis on procurement activities, and following budget reporting best practices by using a dedicated spend management software that incorporates business budgeting software, like Planergy, can help.
This ongoing monitoring can be time-consuming, especially if managed manually, but it is crucial for ensuring that the strategic budget remains aligned with the organization’s long-term goals and objectives.
Implementing tools and processes to streamline budget monitoring and reporting can help mitigate this challenge and promote a more efficient approach to strategic budgeting.

Regardless of business size, the right budgeting strategy can be the difference between success and failure.

Best Practices for Strategic Budgeting

Involving the Leadership Team and All Stakeholders
One of the most important best practices for strategic budgeting is to engage key stakeholders in the business budget planning process.
This ensures buy-in and commitment from all parties involved, fostering collaboration and effective decision-making.
Encourage open communication, solicit input and feedback, and ensure that all stakeholders understand the organization’s long-term goals and the role of the strategic budget in achieving those objectives.
Leveraging Historical Data and Market Research
Leveraging historical data and market research to create accurate financial projections and assumptions is crucial.
Analyze past performance, market trends, and industry insights to make informed decisions about resource allocation and expected outcomes.
You can increase your strategic budget’s accuracy and effectiveness by grounding your strategic budget in data-driven insights.
Using the Right Tools
It’s important to use the right budgeting tools, as they play a crucial role in ensuring the accuracy and efficacy of the budgeting process.
Effective tools streamline data management, facilitate stakeholder collaboration, and allow organizations to monitor their financial performance easily.
While Excel might be an excellent option initially for smaller companies, its limitations become apparent in larger and more complex organizations.
As organizations grow, they require more advanced budgeting solutions and controls to handle increased data volume, automate repetitive tasks, and provide real-time insights into financial performance.
By investing in the right budgeting tools, organizations can significantly improve the efficiency and effectiveness of their budgeting process, ultimately leading to better decision-making, resource allocation, and financial success.
Being Realistic and Conservative
When developing financial projections and assumptions, it’s essential to be realistic and conservative.
Avoid overly optimistic projections that may be difficult to achieve, and instead, focus on attainable goals that align with your organization’s goals for the coming year and long-term objectives.
Additionally, build contingencies into your budget to account for unforeseen events or challenges, ensuring your organization is prepared to adapt and respond to changing circumstances.
Implementing a Rolling Budget
Instead of relying on a traditional annual budget, consider implementing a rolling budget combined with rolling forecasts that is continually updated and extended as new information becomes available.
A rolling budget allows organizations to respond more quickly to changes in the market or their financial situation, promoting agility and adaptability.
Regularly updating and revising your strategic budget ensures it remains aligned with your organization’s evolving goals and priorities.

Budgeting vs. Forecasting: Key Differences

Budgeting: Creating a Financial Plan
Budgeting is the process of creating a detailed financial plan for a specific period, usually a fiscal year, and allocating resources to achieve specific organizational goals.
The budget serves as a roadmap for financial decision-making, guiding how funds should be spent and outlining expected income and expenditures.
Budgets are typically fixed, meaning they remain relatively unchanged throughout the budget period, and are used to assess performance by comparing actual results against the planned figures.
Key aspects of budgeting include:
- Setting financial goals and objectives
- Allocating resources to meet those objectives
- Establishing spending limits and guidelines
- Monitoring progress and comparing actual results against the budget
Forecasting: Estimating Future Financial Outcomes
In contrast, forecasting involves estimating future financial outcomes based on historical data, market trends, and various assumptions. Spend forecasting helps inform budget planning.
Forecasts are more flexible than budgets, as they are continually updated and revised as new information becomes available or circumstances change.
Forecasting helps organizations anticipate future performance, identify potential risks and opportunities, and make proactive decisions to maximize success.
Key aspects of forecasting include:
- Analyzing historical data and trends
- Identifying potential risks and opportunities
- Estimating future revenues and expenses
- Adjusting forecasts as new information becomes available

Embrace Strategic Budgeting for Long-Term Success

Strategic budgeting is a powerful tool for aligning an organization’s financial resources with its long-term objectives.

By following the steps outlined in this guide and implementing best practices, businesses and organizations can effectively create and manage their operating budgets, achieving growth, innovation, and financial stability.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

Read our case studies, client success stories, and testimonials.
Visit our Spend Analysis Software page to see how Planergy can empower you to get more value from your spend.
Learn about us, and our long history of helping companies just like yours.

2. Download our “Indirect Spend Guide”

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

The post Strategic Budgeting: What Is It, Process, and Best Practices appeared first on Planergy Software.

Budgeting Process: Steps and Best Practices for Planning a Budget

Keith Murphy — Tue, 05 Sep 2023 14:44:04 +0000

Download a free copy of "Indirect Spend Guide", to learn:

Where the best opportunities for savings are in indirect spend.
How to gain visibility and control of your indirect spend.
How to report and analyze indirect spend to identify savings opportunities.
How strategic sourcing, cost management, and cost avoidance strategies can be applied to indirect spend.

Download Free Copy

Budgeting Process: Steps and Best Practices for Planning a Budget

Category

Best Practices & Tips Budget Management Process & Procedures

Written by Keith Murphy
19 min read

Tags

Last edited

July 2, 2024

KEY TAKEAWAYS

Budgeting is crucial to ensure your business has enough money to remain operational and earn profit.
Using financial tools can help save time and resources while improving accuracy in the budgeting process.
Whether you have a small business or a large corporation, the basic steps and best practices for managing budgets are the same.

Budgeting is a vital aspect of financial management that helps businesses allocate resources effectively, control costs, and achieve their financial goals.

In this article, we will discuss the typical steps involved in the budgeting process, the challenges of forecasting, best practices for effective business budgeting.

We will also look at how spend management software, like Planergy, can help keep track of expenses and control spending within budget limits.

Why is Business Budgeting Important?

Business budgeting plays a crucial role in the financial success of a company. Regardless of size, all companies must have an annual budget for every fiscal year.

Larger companies may have a budget committee in charge of creating multiple types of budgets, including operating budgets and departmental budgets.

The end goal should be a detailed budget that covers everything you expect to spend, plus some excess for discretionary spending.

Budgeting should be part of regular financial planning. As you make budget decisions, consider:

Available funds
Capital expenditures and operating expenses, including variable and fixed costs
Plans for the next fiscal year

Use documents such as your:

Income statement
Cash flow statement
Utility bills
Payroll documents

These documents will help you develop your master budget. Use your business plan as a guide if it’s your first year in business.

If you’ve been in business for a while, you can use information from the prior year to help you set up the budget.

This is the case unless you are using a zero based budgeting approach.

Sets Financial Goals and Objectives

A well-prepared budget serves as a roadmap for your business’s financial growth. By setting clear financial targets, you can align your business strategies with your desired outcomes, such as increased revenue, reduced expenses, or higher profitability.

Budgeting also helps you prioritize investments and allocate resources to achieve these objectives effectively.
Allocates Resources Efficiently

Business budgeting lets you analyze your company’s financial needs and distribute resources accordingly.

This ensures that each department or project receives adequate funding, vital for smooth operations and achieving your business goals.

Efficient resource allocation also helps you avoid overspending and maintain a healthy cash flow.
Identifies Potential Financial Problems Before They Arise

Regular budgeting lets you spot financial issues early on, such as declining sales, rising costs, or cash flow shortages.

By identifying these problems in advance, you can take proactive measures to address them, such as cutting unnecessary expenses, renegotiating contracts, or seeking additional funding.

This ensures that your business remains financially healthy and avoids costly issues down the line.
Modern Software Reduces Budgeting Time & Effort

Many businesses still rely on outdated, manual budgeting methods, such as spreadsheets or pen and paper.

This can be time-consuming and error-prone, leading to inaccuracies in financial forecasting. By using modern budgeting software, businesses can dramatically reduce the time and effort required to generate accurate budgets.

Accurate real-time tracking and reporting on budget vs actual expenditure can avoid overspends and gives visibility of underspends so budgets can be adjusted or reallocated as needed.

Business budgeting software automates many of the manual processes, allowing you to quickly develop comprehensive financial plans without sacrificing accuracy or detail.

This can provide peace of mind that your business’ finances are well-managed and help enable more informed decision making, and easier financial reporting.
Measures Business Performance Against Established Benchmarks

A budget is a benchmark against which you can compare your financial performance. This enables you to evaluate your company’s progress toward its financial goals and identify areas that need improvement.

Regularly reviewing your budget and adjusting it based on your business’s performance helps you stay on track and make informed decisions.
Helps Decision-Making and Long-Term Planning

Budgeting provides valuable insights into your business’s financial health and future prospects. These insights are essential for making strategic decisions, such as expanding into new markets, launching new products, or acquiring other businesses.

Additionally, a well-structured budget can help you plan for long-term growth by identifying opportunities for cost reduction, revenue generation, and investment.

No matter what your budget looks like, set aside some funds to account for unexpected expenses or overages.

Steps in the Budgeting Process

Budgeting is a crucial aspect of financial management that helps businesses plan and allocate resources effectively.

It typically involves the following steps:

Setting Financial Objectives

Start by determining your short-term and long-term financial goals, such as increasing revenue, reducing costs, or improving profitability.

These objectives should be specific, measurable, achievable, relevant, and time-bound (SMART) to ensure they are realistic and attainable.
Gathering Historical Data

Review past financial statements, records, and reports to gain insights into your business’s financial performance and trends. This can include a budget analysis report and budget variance analysis.

This information will help you identify areas of strength and weakness and opportunities for improvement and growth.

Using spend management software, like Planergy, will allow you to gain real-time spend visibility and make better decisions.
Forecasting Revenues and Expenses

Based on historical data, market research, and industry trends, estimate future sales, costs, and other financial variables. Variable expenses can be difficult to budget for, so they need to be considered carefully.

Consider factors such as seasonality, economic conditions, and changes in your business operations when making these projections.
Preparing a Preliminary Budget

Create a draft budget that outlines your projected revenues, expenses, and cash flow.

This should include line items for each category of income and expenditure, as well as a summary of your overall financial position.
Reviewing and Adjusting

Analyze the preliminary budget to ensure it aligns with your financial objectives and accurately reflects your business’s anticipated financial performance.

Make any necessary adjustments, such as reallocating resources or revising revenue projections, to create a more accurate and realistic budget.
Implementation

Once your budget is finalized, communicate it to relevant stakeholders, such as department heads, employees, and investors.

Ensure that everyone understands the budget’s objectives and their role in achieving them. Integrate the budget into your business operations, using it as a guide for decision-making and resource allocation.
Monitor and Review

Regularly track your actual financial performance against the budget to identify any discrepancies or areas that require attention.

Review your budget periodically and adjust as needed to account for changes in your business environment or financial performance.

This ongoing monitoring and review process will help you stay on track and ensure that your budget remains an effective tool for managing your business’s finances.

Budget Forecasting Challenges

Economic Uncertainty

Unpredictable market conditions, such as consumer demand fluctuations, interest rate changes, or shifts in global economic trends, can impact your revenue projections and expense estimates.

Economic uncertainty makes it difficult to accurately predict your business’s financial performance, which can lead to over- or underestimating your budgetary needs.

To address this challenge, consider using multiple scenarios (optimistic, realistic, and pessimistic) in your budget forecasting process to account for potential variations in market conditions.
Inaccurate Historical Data

Your budget forecasts rely heavily on historical reporting data to project future revenues and expenses. Incomplete or incorrect historical data can lead to flawed forecasts, resulting in unrealistic budget expectations and poor decision-making.

To overcome this challenge, maintain accurate and up-to-date financial records, and review them regularly for errors or inconsistencies.

Use industry benchmarks and market research to supplement your historical data and provide a more comprehensive view of your business’s financial outlook.
Changes in Business Operations

Significant changes in your business operations, such as new product launches, acquisitions, or changes in your supply chain, can impact your budget projections.

These changes may introduce new revenue streams or alter your cost structure, making it challenging to forecast your business’s financial performance accurately. For example, a significant increase in operations can result in a decrease in cash flow.

To address this challenge, closely monitor any changes in your business operations and incorporate them into your budget forecasts.

This may involve updating your revenue projections, adjusting your expense estimates, or reallocating resources to accommodate the changes.

Benefits of Business Budgeting

Improved Financial Control

Budgeting helps you monitor and manage your business’s finances more effectively. By setting financial targets and allocating resources accordingly, you can track your company’s performance and ensure it stays on track to achieve its goals.

A well-prepared budget also enables you to identify areas where cost savings can be made, or resources can be reallocated to maximize efficiency.
Enhanced Decision-Making

A well-prepared budget provides valuable insights for strategic planning and decision-making.

By analyzing your projected revenues and expenses, you can identify growth opportunities, prioritize investments, and make informed decisions about your business’s operations.

Budgets also serve as a reference point for evaluating the financial impact of various alternatives, helping you choose the most cost-effective and beneficial options for your company.
Better Risk Management

By identifying potential financial issues early on, budgeting allows you to mitigate business risks and implement contingency plans.

Regularly monitoring your budget helps you spot potential problems, such as cash flow shortages or declining revenues, before they become critical.

This proactive approach to risk management allows you to address issues in a timely manner and minimize their impact on your business’s financial health.
Increased Profitability

Effective budgeting helps optimize resource allocation and control costs, increasing profits.

By carefully planning your expenses and analyzing your procurement spend you can identify areas where cost savings can be achieved, you can reduce unnecessary spending and improve your company’s bottom line.

A well-structured budget can help you identify new revenue opportunities and invest in initiatives to drive growth and profitability.

Best Practices for Business Budgeting

To ensure effective business budgeting you should consider following these best practices:

Involve Relevant Stakeholders

Include employees from different departments to gather diverse perspectives and insights.

Involving key stakeholders in the budgeting process ensures a more comprehensive understanding of the company’s financial needs and promotes buy-in and commitment to achieving budget goals.
Use Current, Accurate Data

Base your revenue and expense projections on accurate, up-to-date information. If the information is not accurate or not up to date you can be sure your budget will have the same problem.
Be Realistic with Expectations

Avoid overly optimistic or pessimistic assumptions that could lead to unrealistic expectations and poor decision-making. Use historical data and industry benchmarks to create a more reliable and achievable budget.
Adjust for Seasonality

Consider seasonal fluctuations in sales and expenses when creating your budget. Many businesses experience variations in demand and costs throughout the year due to factors like holidays, weather, and consumer behavior.

Incorporating these fluctuations into your budget can help you better plan for and manage resources during peak and off-peak periods.
Use a Rolling Forecast

Update your budget regularly to account for market conditions and business operations changes. A rolling forecast is an approach where you continually update your projections for a set period (e.g., 12 months) as new data becomes available.

This enables you to maintain a more accurate and up-to-date financial outlook, allowing for quicker strategy and resource allocation adjustments as needed.

How Can Software Help You Manage Your Budget?

Spend management software like Planergy can help you manage your budget by:

Streamlining Data Collection

Spend management software like Planergy can help you manage your budget by automatically importing financial data from various sources.

This saves time and reduces errors by eliminating manual data entry and ensuring your budget is based on accurate, up-to-date information.
Facilitating Better Collaboration

Enable team members to work together on business budget planning and review processes using spend management software.

This fosters better communication and collaboration among stakeholders, allowing for a more comprehensive understanding of the company’s financial needs and promoting commitment to achieving budget goals.
Providing Real-Time Insights

Generate reports and dashboards with spend management software that allows you to monitor your financial performance in real-time.

This enables you to quickly identify trends, discrepancies, and areas of concern, allowing for more informed decision-making and timely adjustments to your budget and strategy.
Improving Expense Tracking

Track expenses against your budget with ease using spend management software, and identify areas where spending can be controlled.

This helps ensure your business stays within budget, allowing for more effective resource allocation and improved financial performance.

Simplify Business Budgeting with Planergy

Effective business budgeting is crucial for managing your company’s finances, making informed decisions, and achieving financial goals.

By following best practices and leveraging spend management software like Planergy, you can create an accurate and comprehensive budget that supports your business’s long-term success.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

Read our case studies, client success stories, and testimonials.
Visit our Spend Analysis Software page to see how Planergy can empower you to get more value from your spend.
Learn about us, and our long history of helping companies just like yours.

2. Download our “Indirect Spend Guide”

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

The post Budgeting Process: Steps and Best Practices for Planning a Budget appeared first on Planergy Software.

7 Tips For Managing Project Budgets Successfully

Rob Biedron — Tue, 25 Oct 2022 09:15:30 +0000

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7 Tips For Managing Project Budgets Successfully

Category

Budget Management Procurement Project Management

Written by Rob Biedron
19 min read

Tags

Last edited

July 2, 2024

Start with a Realistic Project Budget

What is a Project Budget?

A project budget is a tool that project managers use to control costs and track spending throughout the life of their project. A well-crafted budget will help you stay on track and avoid going over budget.

To create a good budget, you will need to have a clear understanding of your project’s costs, which can be divided into three categories: direct costs, indirect costs, and contingency costs.

Direct costs, such as materials, labor, and travel, are directly related to the project. Indirect costs are more general expenses that are not specific to the project but are necessary for its execution, such as overhead, insurance, and rent. Contingency costs are funds set aside in case of unforeseen circumstances, such as cost overruns or delays.

Creating Your Budget

Estimate your direct costs by breaking your project into smaller tasks and assigning cost estimates to each task. Once you have an estimate for each task, you can add them to get an estimate for your total direct costs.

You must consult your financial team to calculate indirect and contingency costs. They will help you determine your project’s appropriate indirect and contingency costs. Once you have your cost estimates, you can begin putting together your budget for the entire project and come up with a final budget estimate.

There are a few different ways to format your budget, but one of the most common is the top-down method. With this method, you start with your total estimated cost and then break it down into smaller categories for each expense type. This can help give you an overview of where your money is going and identify any potential areas where you may be able to save money.

Other methods of budget planning include bottom up, analogous estimating, and parametric estimating. No matter which methodology you use, the budgeting process must include as many expected costs, as accurately as possible to ensure project success.

Once you have created your initial budget, it is important to revisit it regularly and adjust based on changes in scope or unforeseen circumstances. By doing this, you can ensure that your budget remains accurate and realistic throughout the life of your project.

Keep Detailed Records

One of the most important things you can do when managing a project budget is to keep detailed records. This includes invoices and receipts to track your spending in each category. Doing so will not only help you stay on top of your finances, but it will also make it easier to spot any potential problem areas.

Keeping detailed records sounds like a lot of work, but it’s quite simple.
- Make sure you have a central place to store all project documents. This could be a physical filing cabinet or an electronic folder on your computer. If you’re working with a team, it’s also important to have a shared storage space where everyone can access the necessary documents.
- Create a template for each type of document you’ll need to create. This will save you time in the long run by ensuring that all the information you need is included in each document.
- Keep track of deadlines and deliverables in a shared calendar. This way, everyone on the team knows what needs to be done and when it needs to be done.
- Assign tasks to team members and track their progress. This will help you identify bottlenecks and ensure that everyone is pulling their weight.
Clear and consistent communication is essential for any team to function properly. By keeping detailed records, you can ensure everyone is on the same page and working towards the same goal.

Detailed records give you a clear overview of your project, which allows you to make better decisions about where to allocate resources and how to proceed with the project.

Working on a project can be stressful, and it’s not uncommon for disagreements to arise between team members. You can avoid misunderstandings and resolve conflicts quickly and efficiently by keeping detailed records.

Set a Limit for Each Category

Set a limit for each category in your budget. This will help you stay on track and prevent overspending in any area. For example, you might want to set a limit of \$500 for travel expenses. Once you hit that limit, you’ll know it’s time to start cutting back.

Of course, there’s no magic number when setting limits. The key is to find what works for you and stick to it, using past projects and forecasting as your guide. If you find that you’re constantly going over your limits, then adjust accordingly.

The goal is to find a system that helps your project team stay organized and productive without being too restrictive.

The amount you set as a limit for each category will depend on several factors, including the project’s size and scope, funding availability, and market conditions.

It’s important to consult with your team and other stakeholders when setting these limits so that everyone is on the same page and knows what they need to do to stay within the budget.

It can also be helpful to create a contingency fund—an amount of money set aside in case something unexpected happens or goes wrong. This contingency fund should not cover careless mistakes; rather, it should only be used for genuine emergencies.

Use Software to Help You Track Your Progress

There are plenty of great software options out there that can help you manage your project budget more effectively. Using one of these tools, you’ll be able to track your progress and ensure that you’re staying on track.

One of the benefits of using project management software is that it can help you save time. Rather than having to track your progress manually, the software will do it for you. This can free up your time to focus on more important tasks.

In addition, if you’re working with a team, team members can use the software to collaborate and stay up-to-date on the project’s progress.
- Asana
  
  Asana is a great all-in-one project management tool that can be used for tasks such as tracking milestone progress, assigning tasks, and messaging teammates. Asana has a feature called “My Tasks,” which allows users to see all the tasks they are responsible for in one place.
  
  This is a great way to quickly see what tasks need to be completed and track your progress. Asana also has a “Progress” view which shows users how their projects are progressing.
- Trello
  
  Trello is another excellent project management tool that can be used for tracking progress. Trello has a “Progress” view which shows users the percentage of tasks completed for each project. This is a great way to overview your progress on multiple projects quickly.
  
  Trello also allows users to create custom reports, which can be very useful for tracking specific metrics related to your project’s progress.
- Smartsheet
  
  Smartsheet is a great tool for creating detailed reports about your project’s progress. Smartsheet allows users to create custom reports with various metrics and data points. This is a great way to track your progress over time and see how your project is doing concerning your goals.
  
  Smartsheet also has a “Gantt Chart” view which can be used to see the timelines of your projects and ensure that you are staying on track.

Using Planergy in conjunction with your project management tool and project plan can help you keep an eye on projected costs vs. actual costs and prevent scope creep and budget overrun.

Review Your Budget Regularly

Another important tip is to review your budget regularly. This will help you catch any potential problems early on and make necessary adjustments accordingly.

For example, if you find that you’re consistently overspending in one particular area, you may need to make some changes to how much money you’re allotting for that category in the future to stay on budget.

Regular budget review also prevents costly mistakes such as:
- Underestimating expenses. One of the most common mistakes project managers make is underestimating the cost of their project. Don’t let this happen to you! Review your budget regularly and adjust it as needed to account for unexpected costs.
- Failing to track changes. Another mistake is failing to track changes in your budget and expenditures. If you’re not tracking changes, you won’t be able to see where money is being wasted and make necessary adjustments. Keep a close eye on your budget and make changes as needed.
- Not accounting for inflation. Inflation can eat into your project’s profitability if you’re not careful.
- Forgetting about taxes. Depending on the jurisdiction in which your project is taking place, taxes may need to be accounted for.
- Not having a contingency plan. Some project managers make a big mistake not having a contingency plan in case their project goes over budget. Without a contingency plan, you could be in serious financial trouble if your project costs more than expected. Make sure to have a contingency plan in place before starting your project.
No matter how well you plan, there will always be unexpected costs associated with any project. That’s why it’s important to review your budget regularly and make adjustments as necessary. Doing so can keep your project on track and avoid any costly surprises.

Cut Costs Wherever Possible

As a project manager, one of your primary goals is to deliver a high-quality product or service while staying within budget. Often, meeting both of these objectives can seem like an impossible feat. However, there are ways that you can cut costs without sacrificing quality.

Being strategic and intentional about where you make cuts can save your company money without compromising on the final product.

Prioritize What’s Important

When trying to cut costs, it’s important to prioritize what’s most important. Not every part of the project needs to be perfect to get a successful project. Identify the key components of the project and focus your attention (and budget) on those areas. The other aspects of the project can be scaled back to save money.

Be Efficient with Resource Management

There are many ways to be efficient with your resources in today’s world. Countless software programs and online tools can help you streamline your processes and save time (and money). Do some research to see what might work for your project, and then implement those efficiencies. This will free up more time (and money) to focus on the most important areas of the project.

Know When to Outsource

There are some aspects of a project that are better left to professionals. If there’s a task that you’re not confident in completing or if it’s outside of your area of expertise, it might be better (and cheaper) to outsource it. This way, you can be sure that the task will be done right the first time, and you won’t have to waste valuable time (and money) trying to fix it yourself.

Ask your procurement team to negotiate with vendors or look for cheaper alternatives to the products and services that you’re using. Every little bit helps, so don’t be afraid to get creative when finding ways to save money.

Stay Flexible

it’s important to stay flexible when managing a project budget. Things change all the time, so there’s no use getting too tied down to one particular way of doing things. If something isn’t working or if something unexpected comes up, don’t be afraid to make changes as needed.

The most important thing is ensuring that your project stays within its budget—everything else is secondary to that goal.

While similar projects and historical data from previously completed projects are a great starting point for planning your budget and setting a baseline, two projects are never the same, so project budget management ultimately requires flexibility.

Sometimes, staying within budget means adjusting the project scope or altering the project schedule.

If you can’t shift deadlines or factor in scope changes without additional funding, it may be time to use contingency funds to keep the project moving without adding to its total cost.

Managing a project budget doesn’t have to be difficult if you know what you’re doing. Remember that effective budget management requires careful planning, disciplined execution, and constant vigilance.

But if you can keep all of that under control, you’ll be able to complete your current project on time and within budget.

What’s your goal today?

1. Use Planergy to manage purchasing and accounts payable

Read our case studies, client success stories, and testimonials.
Visit our Procurement Solutions page to see how Planergy can digitize and automate your procurement processes saving you time and money.
Learn about us, and our long history of helping companies just like yours.

2. Download our “Indirect Spend Guide”

3. Learn best practices for purchasing, finance, and more

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles.

The post 7 Tips For Managing Project Budgets Successfully appeared first on Planergy Software.

Activity-Based Budgeting

Keith Murphy — Tue, 22 Mar 2022 17:09:45 +0000

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Activity-Based Budgeting

Category

Best Practices & Tips Budget Management

Written by Keith Murphy
16 min read

Tags

Last edited

June 24, 2024

Organizations are often tempted to allocate most of their resources to operational activities that boost revenue and profitability. However, focusing on revenue-generation activities is not the only way to increase profits.

An organization can squeeze out higher profits from revenue by keeping a tab on costs and optimizing them wherever possible.

But here’s a catch—unnecessary reduction in costs may force a company to compromise on the integrity and quality of business operations.

Hence, the company should carefully evaluate every possible way to reduce costs and then make an informed decision.

Here a budget comes in handy!

As John Maxwell, the No. 1 New York Times bestselling author, coach, and speaker, says, “A budget is telling your money where to go, instead of wondering where it went.”

A budget helps a company allocate resources, calculate variances at the end of the period, and discover possible opportunities for efficiencies. A well-known and highly recognized budgeting method is activity-based budgeting, commonly known as the ABB method.

This article will discuss everything about activity-based budgeting and how it can help an organization keep steady control of costs.

What is Activity-Based Budgeting?

Activity-based budgeting is a management accounting budgeting method that identifies, analyses, records, and forecasts activities leading to costs for an organization.

Every activity that incurs a cost is scrutinized for potential ways to create efficiencies and enhance profitability—by reducing activity levels, eliminating unnecessary activities, or reducing costs for relevant cost drivers for the activity.

This method follows a no-nonsense approach and implies that a budget should be created only for necessary activities. If a cost can’t be traced to an activity, it’s not considered and accounted for in the budget.

Activity-based budgeting doesn’t consider historical data when preparing the budget. Hence, it is a prudent budgeting method for new companies and startups that don’t have historical data.

How does activity-based budgeting differ from the traditional method of budgeting?

Activity-based budgeting and traditional budgeting are the two of most prominent budgeting methods.

Traditional budgeting is a more straightforward way of creating a budget. It adjusts the prior period’s budget for inflation or changes in business activities.

In comparison, activity-based budgeting identifies critical activities and links them to their cost driver to calculate the required activity levels.

For example, a company incurred sales order processing expenses of $10 million last year.

This year, it expects its sales to grow by 10%. If the company opts for traditional budgeting, its current year’s budget for sales order processing will be $11 million.

Now, let’s suppose the company expects to process 1,00,000 sales orders this year. For sales order processing activity, the company has identified labor hours as the cost driver. Each sales order requires 1 hour of processing labor hours and costs $20 per hour. So, each sales order will cost $20 to process.

If the company opts for activity based budgeting, the budget for sales order processing for this year will be $20 million.

This budget is just less than double the budget calculated as per the traditional budgeting method, but it gives the company a more realistic picture of forecasted costs.

Remember, a good business budget always helps forecast cash inflows and outflows and plan thoughtful allocation of resources.

What is the Difference Between Zero-Based Budgeting and Activity-Based Budgeting?

Both zero-based budgeting and activity-based budgeting methods have a few similarities and differences.

If we discuss similarities, both methods don’t consider the previous year’s budget for calculating the current period’s budget. Also, both don’t automatically include items from the last budget.

All expenses are justified for each new period, and only then are resources allocated.

However, the significant difference between the two budgeting methods is the basis of calculation.

Zero-based budgeting starts from zero every year and allocates resources based on the needs and costs of the department. Activity-based budgeting focuses on identifying specific activities and their cost drivers and then reaching the required activity levels.

Zero-based budgeting is function-oriented, whereas activity-based budgeting is activity-oriented.

What Type of Organization Should Use Activity-Based Budgeting?

Mature companies that don’t experience significant changes in their business activity every year may opt for traditional budgeting since it requires less time, money, and effort and is often simpler to calculate.

However, new companies and startups can’t choose traditional budgeting due to a lack of historical data.

Activity-based budgeting can be a savior, particularly for new companies and startups, as it helps the company analyze each cost driver and the corresponding activity levels to make an accurate budget without considering the past year’s budget.

Apart from new companies, activity-based budgeting is also suitable for companies undergoing material operational changes such as a change in the customer base, business lines, a significant shift in the geographical locations of prominent exporters and importers, or expansion in a new business line.

Even while establishing a subsidiary company, the management may adopt activity-based budgeting to allocate required resources.

How is Activity Based-Budgeting (ABB) Different from Activity-Based Costing (ABC)?

Activity Based Budgeting is a budgeting method, whereas Activity Based Costing is a costing method.

Activity Based Costing is used by organizations to allocate the current period’s overhead to products and services based on various activities and their cost drivers.

Whereas, Activity Based Budgeting focuses on allocating the upcoming period’s overhead based on activities and then measuring the actuals against budgeted figures to calculate the variance.

They usually work hand in hand.

Details derived from Activity Based Costing method are used as an input when calculating base rates of cost drivers under Activity Based Budgeting.

What are the Advantages of Activity-Based Budgeting?

Activity-based budgeting is a more realistic way to create a budget and offers the following main advantages to an organization:

Increased control: Each activity that incurs a cost or boosts revenue is scrutinized in activity-based budgeting. It allows the management to exercise better control to find potential efficiencies and cost reduction methods. Also, this strategy creates a cause-and-effect relationship between costs and activities, providing critical insights to decision-makers.
Competitive edge: Once the overall production cost is significantly reduced, an organization can sell products and services at a lower price than its competitors, thereby creating a competitive edge.
Effective allocation of resources: Every company has limited resources. By adopting activity-based budgeting, management can allocate resources to main activities (those that boost revenue) and eliminate or reduce nonprofitabile activities.
Elimination of bottlenecks: By mapping the relationship between various activities and determining their cost drivers, management can avoid all possible bottlenecks that hamper smooth cross-division cooperation.

Focus on process efficiencies: Instead of relying on past data to calculate variances, activity-based budgeting focuses on locating potential ways to create efficiencies and boost profitability.

What are the Disadvantages of Activity-Based Budgeting?

Like any budgeting strategy, activity-based budgeting also contains a few drawbacks which means it may not fit for all companies:

More expensive: Activity-based budgeting is more expensive to implement and maintain than traditional budgeting since it’s executed on a macro level and involves collecting information from various facets of a business.

Time-consuming: Since management has to analyze activities with higher precision and detail down each activity’s impact on overall profitability, activity-based budgeting often consumes more time than other budgeting methods.

Complex: Here, management requires a deeper understanding of various functional areas of a business before determining which activity boosts revenue or incurs cost. Also, trained employees have to execute this strategy, or else it may lead to inaccuracy in budget calculation.

How are Fixed Costs Dealt with Under Activity-Based Budgeting?

While fixing the price of a product or service, we always consider two factors: cost of the product and profit margin.

Further, the cost of a product includes two components – fixed costs and variable costs.

Fixed costs such as factory rent & lease, utility bills, etc., always remain the same, whereas, variable costs will vary based on activity.

By adopting the Activity Based Budgeting method, an organization focuses on reducing or eliminating those unnecessary activities that increase the variable costs.

It can’t reduce the fixed costs, which is why, fixed costs are not accounted for under Activity Based Budgeting.

How to Implement Activity-Based Budgeting?

Activity-based budgeting comprises three main steps:

Identify Activities and Their Cost Drivers

The first step includes identifying key activities that incur costs for an organization and boost or deteriorate profitability.

Next, these activities should be ranked based on their importance so that optimum resources can be allocated to essential activities, followed by secondary activities that add value to customers and eventually benefit the organization.

After segregating activities into main and secondary activities, their cost drivers should be identified.

A cost driver triggers the cost of the activity. It is the root cause behind why an organization incurs a particular cost.

Examples of activity cost drivers are machine setups, maintenance requests, consumed power, purchase orders, productions orders, etc.

For instance, the production of a product requires 5 hours of machine time. Since machine time is an activity, its cost driver will be the number of machine-hours.

Higher machine hours will result in higher overheads for the company.

Let’s suppose, during a month; machines were used for a total of 5,000 hours. Here machine hours are the cost driver, and machine time overhead should be allocated to the product based on machine hours.

By adopting budget reporting and forecasting best practices, an organization can identify the right business and cost drivers.

Project the Number of Units Required Within Each Cost Driver for the Level of Activity Needed

The next step in calculating activity-based budgeting is identifying the number of units required to reach the desired activity level and achieve efficiency.

For instance, in the above example, this month, the company expects a total of 8,000 machine hours.

Calculate the Cost Per Unit of Activity Related to That Cost Driver

Here the cost per unit of activity is calculated based on the cost driver. The result is multiplied by the required number of units to reach the budget.

For instance, in the above example, the company incurred an overhead of $30,000. Since the actual machine hours were 5,000, the cost per unit will be $6 per hour.

Budget = Required activity levels x cost per unit

In our case, since the company expects a total of 8,000 machine hours this month, the total budgeted cost for this month will be 8,000*$6 = $48,000.

Bottom Line

Activity-based budgeting is a time-and-tested method for performance forecasting and measuring for those companies where production overhead costs are significantly higher.

It provides an organization a cushion against an unforeseen future due to added flexibility and innovative approach compared to the traditional budgeting system.

However, by adopting the activity-based budgeting method, an organization may shift its focus to immediate and short-term results and ignore the bigger picture.

Hence, the management should adopt a prudent decision-making approach and choose a budgeting method that meets the company goals accordingly.

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Best Practices For Budgeting In QuickBooks

Mary Girsch-Bock — Wed, 17 Nov 2021 16:12:21 +0000

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Best Practices For Budgeting In QuickBooks

Category

Accounting Budget Management QuickBooks

Written by Mary Girsch-Bock
20 min read

Tags

Last edited

June 5, 2024

Why are budgets important?

Creating a budget is an important part of managing your business properly. Creating a budget is a necessity for properly planning finances while helping to ensure your business can meet existing financial commitments.

Creating a budget also helps businesses plan for additional future expenses.

There are numerous budgets that business owners can create, depending on the needs of the business. But whether you’re a small business or a Fortune 500 company, you’ll need to create a yearly budget for your company.

Of course, a single budget may be sufficient for smaller companies, but larger businesses will need to create additional budgets such as departmental, project, or even location.

You’ll also want to consider creating monthly and quarterly budgets, so you’ll need software that can do that as well.

Budgets must include fixed costs such as facility rent and insurance, variable costs including labor and materials, and any one-time costs that are expected such as funding for a special project.

When preparing a budget be sure to include cash flow estimates as well as any expected profits for the upcoming fiscal year.

The easiest way to create a budget for your business is to use software that can assist in the budget creation process.

Using software will also allow you to properly track income and expenses against the created budget, making it easy for business owners, managers, and CFOs to review budget totals versus actuals.

In addition, using accounting or budgeting software will provide you with a warning when an expenditure puts you in danger of exceeding your budget.

For example, when you create your budget in November, the monthly rent for your office space was $850 per month, so you budgeted $10,200 for rent expenses for the coming year.

However, on December 31, your landlord increased your rent to $1,200 per month, meaning that you’ll quickly approach your budgeted amount much earlier than you expected. If you have good budgeting software, you’ll be given a warning when you approach the $10,200 total that you included in your budget.

Using budgeting or accounting software can also help to minimize errors that can commonly occur when using spreadsheets instead of budgeting software to create a budget.

What is the difference between budgeting and forecasting?

In many cases, budgeting and forecasting terms are used interchangeably, since both look at past company performance and estimate performance for an upcoming period.

However, even with all the similarities, there are some subtle differences. Budgets are usually created using historic financial data, while forecasts typically look forward to predicting future performance.

For example, while budgets are primarily used as a summary outline for future business performance, forecasts are used to indicate how your business is performing, and whether it’s reaching its budgeting goals.

Though the differences are small, if you’re torn between the two, you may find that creating a financial forecast for your business is more useful for longer projections, while a budget can be the more useful tool for businesses that need to adhere to a strict financial plan. However, when used together, they can bring the most benefit.

What are the different types of budgets?

There are many different types of budgets that you can create. The most common budgets used by companies include an operating budget, a financial budget, and a master budget.

A financial budget predicts income and expenses for a specific period. Financial budgets are typically prepared monthly, quarterly, or yearly, depending on the needs of the business. For organizations that struggle to manage cash flow properly, preparing a financial budget can be helpful.

An operating budget offers a detailed projection of company revenue and expenses for the coming year.

Typically created at year-end using data from the year, an operating budget is typically static and used to compare the budget to actual totals throughout the year. Operating budgets can also be adjusted mid-year if any unexpected revenue or expenses occur.

A master budget includes all lower-level budgets that have been prepared for your business including both operating and financial budgets.

Typically used by larger companies with multiple departments or locations, a master budget is used as a planning tool for the company as a whole. Along with operating and financial budgets, labor and materials budgets and manufacturing overhead budgets are also included in a master budget.

If you’re already using QuickBooks you can easily create some basic budgets. For deeper budgeting options an integrated tool like Planergy can help.

Tips for preparing a budget

When preparing a budget there are numerous things you can do to simplify the process while helping to ensure that the budget is as accurate as it can be.

Use historical data when available: If you’re a brand-new business, this is not an option, but for those preparing next years’ budget, the best way to estimate budget totals is not to guess but to use the previous year’s actual data.
Budget according to your business cycle: If you own a seasonal budget, be sure that your budget totals reflect that. For example, if you earn the majority of your revenue during the spring, be sure that your budget reflects higher revenue during that period.
Get your employees involved in the budgeting process: If you’re preparing a departmental budget, be sure to get your employees involved in the budget preparation process. No one knows departmental costs better than the person running that department.
Overestimate expenses and underestimate revenue: It’s always a pleasant surprise when revenue is higher than budgeted – not so much when expenses come in higher than expected. Always be a little conservative when it comes to estimating revenue while tacking on an additional 10% to 15% to your expenses. This can help you manage any unexpected costs and help keep you on budget.
Make adjustments as needed: Static budgets can provide good information for your business, but if they’re not adjusted, when necessary, they can quickly become obsolete. Be sure to revisit your budget regularly and make any adjustments as needed.

What program should I use to prepare my budget?

If you’re already using QuickBooks Desktop or QuickBooks Online, you can easily create some basic budgets. Both applications can create monthly, quarterly, or yearly budgets, with the option to prefill budget totals with previous years’ totals.

QuickBooks Budgets can be created by class, customer, or location, as a profit & loss budget, or as a balance sheet budget.

Businesses are limited to creating one organizational budget per year, though multiple smaller budgets can be created. In addition, you can access two budget reports; the Budget Overview report and the Budget vs. Actuals report.

To create a budget in QuickBooks Desktop, just follow these simple steps:

Under Company, choose the Planning and Budgeting option. You can choose between Set Up Budgets and Cash Flow Projector.
After choosing Set Up Budgets, click on the Create New Budget tab at the top right-hand side of the screen.
Under the Create New Budget option, you can choose between a Profit and Loss budget, which reflects all activity for the current year, or a Balance Sheet, which only includes ending balances.

The Create a New Budget option in QuickBooks Desktop

Highlight the Profit and Loss
Add any additional criteria such as customer job or class.
Choose whether you wish to create a budget from scratch or want to use last year’s data to create your budget.

Choose whether to use previous data or create your budget from scratch.

If you choose to create a budget from scratch, you’ll have access to the budget template within QuickBooks Desktop.

The QuickBooks Desktop budget template lets you enter data from a single screen.

You can enter all of your budgeted totals from this screen. However, if you choose to use prior years’ totals, you can do that from the screen below.

Last year’s data is available for those that wish to utilize it.

Those using Premier, Enterprise of Accountant versions of QuickBooks Desktop can also create a forecast in the application as well.

To create a forecast, follow these steps:

Under the Company menu, choose the Planning & Budgeting option, and then select Set Up Forecast.
Select Create New Forecast.
Choose the fiscal year that you would like to create a forecast for. Like the budgeting option, you can also choose to add additional criteria such as Jobs or Class.
Choose Create Forecast from Scratch if you wish to create a new forecast. If you wish to create a new forecast based on previous data, choose Create Forecast from Previous Year’s Data.

Once budgets have been created, you can opt to run several budget-related reports. These reports include:

Budget Overview
Budget vs. Actual
Profit & Loss Budget Performance
Budget vs. Actual Graph

If you’re using QuickBooks Desktop to create a budget, you may also want to set up the cash flow projector option in the application as well.

The cash flow projector looks at business finances based on a variety of scenarios. Though this feature has been discontinued in QuickBooks Desktop 2022, you can continue to use it in older versions of the application.

Creating a budget in QuickBooks Online

Setting up a budget in QuickBooks Online is relatively simple, though it’s not obvious from the main screen.

Instead, you’ll have to access the budgeting feature under Tools, which is found under Accountant view. To get started, follow these steps.

Click on the gear icon at the top of the screen.
Under Tools, click on Budgeting.

The Accountant View of QuickBooks Online lists all management features.

Click on the Add Budget tab on the screen.
Here, you can name your budget, choose the fiscal year you wish to create a budget for, and whether you wish to pre-fill data from previous budgets. There is also an option to subdivide the budget by customer if you wish. You can also subdivide your budget by location or class if you use them in your business.

In addition, QuickBooks Online also includes a budget wizard that will take you through a complete budget interview process when creating a budget for the first time.

The budget entry screen in QuickBooks Online is easy to use.

If you’ve used both QuickBooks Desktop and QuickBooks Online, you’ll know that creating a budget in QuickBooks Online is much easier than doing so in QuickBooks Desktop.

Other budgeting options

While there are several budget applications on the market, having your budgets integrated with your accounting and financial applications can save you a tremendous amount of time.

While both QuickBooks Desktop and QuickBooks Online applications can easily prepare basic budgets, the ability to customize a budget is limited in both applications.

If you’re looking for more custom budgeting or require multi-year budgets, you may want to consider using a software that integrates with QuickBooks and provides more in-depth budgeting and reporting capabilities.

For example, companies that use Planergy to manage spend and accounts payable can benefit from its extensive budget creation and management capabilities.

Designed for flexibility, Planergy is suitable for use in any industry and can be used in companies of any size. Planergy offers a variety of budgeting tools and includes the following features:

The ability to set budgets by job, department, project, cost center, or person
The ability to create multiple budgets per company
The option to create monthly, annual, or custom date range budgets
Real-time budget reporting with the budget updated each time a purchase order is created or an invoice processed.
All budgets offer drill-down capability, so users can view detailed information on all orders including who is requesting the order when the order was placed, who the supplier on the order is, and if the expenditure has been approved.

Planergy offers budget details for better real-time expense management.

Particularly useful for any company that need to better manage expenses in real-time, applications like Planergy can provide extensive budget customization capability that other applications such as QuickBooks cannot.

Planergy has integration options for QuickBooks Online and QuickBooks Desktop.

Whether you’re using QuickBooks, Planergy, an Excel spreadsheet, or another budgeting tool, creating a budget is an important part of running a business.

Be sure you have the tools in place to create a budget that can be a helpful resource for your business going forward.

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The post Best Practices For Budgeting In QuickBooks appeared first on Planergy Software.

Rolling Budget: Advantages and Disadvantages

Keith Murphy — Wed, 18 Aug 2021 09:27:49 +0000

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Rolling Budget: Advantages and Disadvantages

Category

Budget Management Financial Reporting

Written by Keith Murphy
12 min read

Tags

Last edited

June 5, 2024

Knowing how to craft and stick to a budget is a keystone of business success.

Since the middle of the twentieth century, static budgets were created by forecasting income and expenses for a given period of time (traditionally, the fiscal year), based on the previous year’s performance, market conditions, and the estimates made by skilled team members from across an organization.

These budgets were, as their name implies, fixed, and did not change over the course of the year; the challenge for the company was to adhere as closely as possible to the budget in order to hit the targets set during the budgeting process.

For many modern businesses, competing in a complex and ever-changing global economy makes an annual budget set in stone a little too constricting.

These businesses are embracing rolling budgets, which bring greater flexibility but also a new set of challenges to the financial planning process.

What is a Rolling Budget?

In contrast to traditional static budgets, rolling budgets are continuous budgets. Updated monthly (or, more rarely, quarterly) rather than annually, these budgets expand incrementally as time passes.

Rolling budgets look to the future while still drawing on the past, but with more of a short-term, contextual focus that allows for strategic adjustments as the fiscal year (or other accounting period) progresses.

Consider Company X, which uses an annual budgeting model but updates it with rolling budgets over time. So as a given month in the current year comes to an end—for example, September of 2021—stakeholders perform budget planning for the same month in the following year: September 2022.

These rolling forecasts are used to adjust the annual budget to incorporate insights gleaned from spend analysis and market conditions to provide a refreshed annual budget containing context unavailable in the original budget.

Companies use rolling budgets to:

Achieve greater flexibility in their planning processes and decision-making;
React to changing market conditions, business disruptions, and unforeseen opportunities with greater agility; and
Perform more effective performance management by aligning (or realigning) spending and resource allocation at regular intervals (rather than waiting a full year) to match the business environment and improve competitive advantage.

Generally speaking, rolling budgets are ideal for swift-changing and unpredictable business environments, as well as improving accountability and control over financial planning or cash flow in specific areas that require regular monitoring.

Financial budgets for sales, overhead, and production are increasingly configured as rolling budgets by companies who want firm control over and visibility into their spend in those areas.

Generally speaking, rolling budgets are ideal for swift-changing and unpredictable business environments, as well as improving accountability and control over financial planning or cash flow in specific areas that require regular monitoring.

Advantages of Rolling Budgets

Compared to traditional budgets, rolling budgets provide a number of advantages, including:

Greater agility and flexibility, since rolling budgets provide short-term context not available with a fixed budget set months ago.
Reduced uncertainty and improved tactical utility for managing cash flow, taking corrective action to mitigate disruptions, or leverage fresh insights to take advantage of opportunities for growth, investment, or greater profitability.
Strong support for zero-based budgeting (ZBB), wherein every expense and resource allocation must be justified for every new period, regardless of the previous period’s allocations or approvals. Using ZBB on a monthly basis improves accountability while still permitting flexibility, allowing budget makers to keep costs under control and meet targets while still responding effectively to changes in the business environment.
Better strategic and financial planning since decision-makers have access to, and the ability to adjust, short-term targets for the month and quarter as well as awareness of those for the full year (as impacted by changes to the monthly/quarterly budgets).

Disadvantages of Rolling Budgets

While they provide great flexibility and allow for timely changes to meet evolving market conditions or mitigate business disruptions, rolling budgets do come with a few caveats, including:

Greater demand on staff, resources, and time. Fixed budgets are prepared once, usually in the fourth quarter, for the entire next year. Having to update rolling budgets monthly, quarterly, or both (along with the income statement and other financial documents) can be time consuming, increasing staff and resource costs. This is especially true for the procurement and accounts teams, who will have to either shoulder the entire budgeting process themselves or work with budget owners to make the necessary updates.
The more stakeholders are involved, the more time-consuming, expensive, and complex the process becomes.
Frustration/resistance to change/corporate culture issues. The extra work that comes with continuous budgeting methods can be demotivating without accompanying engagement by leadership to demonstrate its value to organizational growth and competitive strength.
Companies who are adopting rolling budgets for the first time may face significant resistance from staff who are accustomed to the workflows and scheduling that come with fixed budgets. For budget holders, constantly updated targets may become demotivating as they struggle to keep the strategic big picture in mind while dealing with the tactical realities of monthly and quarterly updates.
In these scenarios, additional training, combined with a collaborative approach to implementation and strong efforts by management to hear and meet the team’s needs, will go a long way toward smoothing the transition.
In addition to additional staff-related expenses, rolling budgets may require the addition of new software tools to be optimally effective. Organizations still relying on Excel spreadsheets or manual, paper-based workflows may simply find themselves overwhelmed by the extra work and time demands that come with rolling budgets.
Implementing a best-in-class, cloud-based spend management and budgeting solution like Planergy can help mitigate these concerns. A centralized spend management solution generates immediate savings by eliminating the need for paper and manual workflows. In addition, it offers advanced digital tools such as robotic process automation, centralized data management, and powerful spend analytics. These help eliminate human error, increase accuracy, speed, and efficiency in all processes (including budgeting and forecasting), reducing expenses and frustration so your team can focus on building effective budgets that meet both your short-term and long-term business needs.

How to Prepare a Rolling Budget

Every business has its own specific budgeting needs, but you can create a general rolling budget by following a few simple steps.

Work with all relevant stakeholders to prepare a budget for each month of a full year (e.g., January through December, or whatever months span your company’s fiscal year).
At month end, perform spend analysis and performance management, including budget variance analysis, to determine the difference between the estimates made during the budgeting process and the actual activity for the accounting period.
Based on the results of your analyses, perform the necessary adjustments to create a new budget reflecting the events of the month coming to an end.
For example, if you’re coming to the end of August and discover the cost of raw materials for one of your product lines has increased by 2.7% over the amount spent in August of last year, be sure to include this adjustment in your budget moving forward for the rest of the year, in addition to any other estimated changes you might have already made for next August based on business intelligence, internal process improvements, etc.
“Top off” the new budget to a full year by removing August of the current year and adding your forecasted budget for August of next year.
Repeat monthly.

Is Your Business Ready for Rolling Budgets?

Whether you’re looking ahead to next year or next period, your business needs a reliable budgeting process.

Choosing between a traditional budget and a continuous budget will depend largely on your company’s business processes and structure, as well as the stability of your market.

But if you’re prepared to dedicate the necessary resources, secure buy-in from your staff, and act swiftly to leverage the insights gleaned from implementing a rolling budget, you can enjoy greater competitive agility and smarter decision-making to help boost your company’s performance and profitability.